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Africa: Global Pirates vs. Tax Justice

AfricaFocus Bulletin
Aug 9, 2012 (120809)
(Reposted from sources cited below)

Editor's Note

A new report from the Tax Justice Network estimates that the global super-rich have at least $21 trillion in secret tax havens, the equivalent of the United States and Japanese economies combined. While these estimates presumably include funds such as those held by Mitt Romney in "offshore" accounts in the Cayman Islands, they also include as much as $944 billion estimated last year to be derived from capital losses to Africa between 1970 and 2008.

And a report from a High-Level Panel sponsored by the African Union, Illicit Financial Flows from Africa: Scale and Developmental Challenge, announced recently but not yet published (see http://tinyurl.com/clvch9b) estimates that Africa loses as much as $1.5 trillion in illicit financial flows each year.

All such figures are of course estimates, with secrecy and incomplete data making more precise calculations impossible. But there is no doubt about the astounding order of magnitude of sums hidden from tax authorities of developing and developed countries alike. The entire process is facilitated by a "pirate" network dominated by the world's leading banks and related financial institutions, and by consistent failure of governments in both rich and poor countries to enforce anti-money-laundering regulations that in theory are supposed to prevent such transactions.

In other words, Africa's capital losses, which by far exceed the international debts on the books of African countries or the official development assistance provided to Africa, are part of a more general pattern which pervades the international financial system.

This AfricaFocus Bulletin contains a press release and a memo on key issues from the report "The Price of Offshore Revisited," released late last month. The full report and other related material is available http://tinyurl.com/9bp73wq and on the websites of the Tax Justice Network (http://www.taxjustice.net and http://www.tjn-usa.org).

For additional commentary on this report, see the Democracy Now interview with author of the study James Henry, video and transcript at http://www.democracynow.org / direct URL: http://tinyurl.com/cma8u5q

For previous AfricaFocus Bulletins on related issues, visit http://www.africafocus.org/debtexp.php Particularly relevant are the excerpts on Measuring Capital Flight, from the book Africa's Odious Debt, available at http://www.africafocus.org/docs11/cap1112.php


Announcements

(1) AfricaFocus Bulletin will be taking a break from publication for the rest of August. Regular publication will resume in early to mid-September. The AfricaFocus website, Google+, Facebook, and Twitter feeds will continue to be updated periodically during this period.

(2) No Easy Victories: African Liberation and American Activists over a Half Century, 1950-2000, edited by William Minter, Gail Hovey, and Charles Cobb Jr., is now available in electronic format on Google Books and on Kindle, in agreement with Africa World Press. Print copies are also still available from Africa World Press, on Amazon, and at a discount on the No Easy Victories website (http://www.noeasyvictories.org).

The Google Book version is now available for browsing at http://books.google.com/books?id=j-e2Bz_GCgMC It should be available later this month at the same link in a downloadable e-book format from Google at $5.95. It is also available now at $5.95 on Kindle from Amazon USA or Amazon UK at http://www.africafocus.org/books/isbn.php?B008QQBYLO

++++++++++++++++++++++end editor's note+++++++++++++++++

The Price of Offshore Revisited: Press Release

19th July 2012

Tax Justice Network
http://taxjustice.blogspot.com / direct URL: http://tinyurl.com/9bp73wq

Revealed: global super-rich has at least $21 trillion hidden in secret tax havens

For more information about this report, please contact:

  1. James S. Henry, TJN Senior Adviser/ Main researcher for this report, United States. Email: jhenry@sagharbor.com Office: (001) 631 725 5202 US Mobile: (001) 516 721 1452
  2. John Christensen, director, Tax Justice Network, United Kingdom Email: john@taxjustice.net Mobile: (00 44) 7979 868302
  3. Nick Mathiason, Bureau for Investigative Journalism Email: nickmathiason@tbij.com Mobile: (00 44) 77 99 348 619

At least $21 trillion of unreported private financial wealth was owned by wealthy individuals via tax havens at the end of 2010. This sum is equivalent to the size of the United States and Japanese economies combined.

There may be as much as $32 trillion of hidden financial assets held offshore by high net worth individuals (HNWIs), according to our report The Price of Offshore Revisited, which is thought to be the most detailed and rigorous study ever made of financial assets held in offshore financial centres and secrecy structures.

We consider these numbers to be conservative. This is only financial wealth and excludes a welter of real estate, yachts and other non-financial assets owned via offshore structures. The research for the Tax Justice Network (TJN) by former McKinsey & Co Chief Economist James Henry comes amid growing concerns about an enormous and growing gulf between rich and poor in countries around the globe. Accompanying this research is another study by TJN, entitled Inequality: You Don't Know the Half of It, which demonstrates that all studies of economic inequality to date have failed to account properly for this missing wealth. It concludes that inequality is far worse than we think.

Henry draws on data from the World Bank, the IMF, the United Nations, central banks, the Bank for International Settlements, and national treasuries, and triangulates his results against data reflecting demand for reserve currency and gold, and data on offshore private banking studies by consulting firms and others. Other main findings of this wide-ranging research include:

  • Our analysis finds that at the end of 2010 the Top 50 private banks alone collectively managed more than $12.1 trillion in cross-border invested assets for private clients, including their trusts and foundations. This is up from $5.4 trillion in 2005, representing an average annual growth rate of more than 16%.
  • The three private banks handling the most assets offshore on behalf of the global super-rich are UBS, Credit Suisse and Goldman Sachs. The top ten banks alone commanded over half the top fifty's asset total - an increased share since 2005.
  • The number of the global super-rich who have amassed a $21 trillion offshore fortune is fewer than 10 million people. Of these, less than 100,000 people worldwide own $9.8 trillion of wealth held offshore.
  • If this unreported $21-32 trillion, conservatively estimated, earned a modest rate of return of just 3%, and that income was taxed at just 30%, this would have generated income tax revenues of between $190-280 bn - roughly twice the amount OECD countries spend on all overseas development assistance around the world. Inheritance, capital gains and other taxes would boost this figure considerably.
  • For our focus subgroup of 139 mostly low-middle income countries, traditional data shows aggregate external debts of $4.1 tn at the end of 2010. But take their foreign reserves and unrecorded offshore private wealth into account, and the picture reverses: they had aggregate net debts of minus US$10.1-13.1 tn. In other words, these countries are big net creditors, not debtors. Unfortunately, their assets are held by a few wealthy individuals, while their debts are shouldered by their ordinary people through their governments.

James S. Henry, TJN Senior Adviser and main researcher for The Price of Offshore Revisited, said:

This new report focuses our attention on a huge 'black hole' in the world economy that has never before been measured - private offshore wealth, and the vast amounts of untaxed income that it produces. This at a time when governments around the world are starved for resources, and we are more conscious than ever of the costs of economic inequality.

Using several independent estimation methods, and the most comprehensive data set ever assembled, we have been able to triangulate on the size and growth of this black hole. Despite taking pains to err on the conservative side, the results are astonishing.

  • First, this hidden offshore sector is large enough to make a significant difference to all of our conventional measures of inequality. Since most of missing financial wealth belongs to a tiny elite, the impact is staggering. For most countries, global financial inequality is not only much greater than we suspected, but it has been growing much faster.
  • Second, the lost tax revenue implied by our estimates is huge. It is large enough to make a significant difference to the finances of many countries, especially developing countries that are now struggling to replace lost aid dollars and pay for climate change. Indeed, once we take these hidden offshore assets and the earnings they produce into account, many erstwhile 'debtor countries' are in fact revealed to be wealthy. But the problem is, their wealth is now offshore, in the hands of their own elites and their private bankers. Indeed, the developing world as a whole has been a significant CREDITOR of the developed world for more than a decade. That means this is really a tax justice problem, not simply a 'debt' problem.
  • Third, it turns out that this offshore sector - which specializes in tax dodging - is basically designed and operated, not by shady no-name banks located in sultry islands, but by the world's largest private banks, law firms, and accounting firms, headquartered in First World capitals like London, New York, and Geneva. Our detailed analysis of these banks shows that the leaders are the very same ones that have figured so prominently in government bailouts and other recent financial chicanery.
  • Fourth, given all this, it is scandalous that official institutions like the Bank for International Settlements, the IMF, the World Bank, the OECD, and the G20, as well as leading central banks, have devoted so little research to this sector. This scandal is made worse by the fact that they already have much of the data needed to estimate this sector more carefully. For reasons of their own, they have tolerated the growth of the offshore sector for far too long, out of sight. It is time for them to live up to their promises, and work with us on concrete policies to get it under control.
  • From another angle, this study is really good news. The world has just located a huge pile of financial wealth that might be called upon to contribute to the solution of our most pressing global problems. We have an opportunity to think not only about how to prevent some of the abuses that have led to it, but also to think about how best to make use of the untaxed earnings that it generates.

The Price of Offshore Revisited: Key Issues

22 July 2012

Beyond the headline figures, this report for the Tax Justice Network (TJN) raises a great many urgent issues for global attention. Here we highlight just four.

1. 'Pirate' Banking

Of the top ten players in global private banking - the business of helping the world's richest people park their wealth offshore and conceal it from the authorities and escape the rule of law - all ten received substantial injections of government loans and capital during 2008-2012.

In effect, ordinary taxpayers have been subsidising the world's largest banks to keep them afloat, even as they actively help wealthy clients slash taxes and commit a host of other crimes.

Many of the market leaders in this global 'pirate' banking industry have also been identified in many other forms of dubious activity, from Libor rigging, to irresponsible lending, to high-risk trading that led to the financial crisis, to outright money laundering for criminal gangs. This report shows that the world's largest banks have, if anything, been expanding their tax haven-related 'pirate banking' operations significantly in recent years.

Is there now such a thing as 'Too Big To Be Honest?'

2. Inequality.

The TJN report Inequality: You Don't Know the Half of It (which accompanies The Price of Offshore Revisited) also exposes how all conventional measures sharply understate income and wealth inequality in every country and in every study.

The tens of trillions of 'missing' financial assets we identify in this report are on a larger scale than any estimate hitherto produced, and substantially not counted in any inequality study.

The impact on inequality implied by our new data is astonishing. We estimate that fewer than 100,000 people - that is, 0.001% of the world's population, now control over 30% of the world's financial wealth.

Since the offshore industry experienced take-off in the late 1960s it has been growing relative to the rest of the world economy through 2010: this also leads us to expect that the trend of rising inequality has been understated too, probably in every study.

3. Who are the real debtors? Our research reveals that a large number of countries, which are traditionally regarded as debtors, are in fact creditors to the rest of the world. For our focus group of 139 mostly low-middle income countries, traditional data shows they had aggregate external debts of $4.1 trillion at the end of 2010. But once you take their foreign reserves and the offshore private holdings of their wealthiest citizens into account, the picture flips into reverse: these 139 countries have aggregate net debts of minus US$10.1-13.1 tn.

In other words, these countries are net creditors to the world, and in a big way. The problem here is that their assets are held by a small number of wealthy individuals, while their debts are shouldered by their ordinary people through their governments.

These countries are painted as having a debt problem. But the true picture is radically different: they have a hidden offshore wealth problem. In terms of tackling poverty, it is hard to imagine a more pressing global issue to address.

4. Turning a blind eye to the missing data

The world's premier multilateral financial institutions have paid almost no attention to this 'black hole' in the global economy. It has been left to groups such as TJN to support the painstaking factual analysis underlying this report.

Yet institutions like the World Bank, the IMF, the US Federal Reserve, the Bank of England, and the Bank for International Settlements have ready access not only to the analytic resources, but also to much of the raw data needed to more precisely quantify the dimensions of this problem.

Why have they turned a blind eye?

A key priority for the G20 countries must be to require these global public institutions to devote more serious study to this topic, to make available more of the private data on offshore banking that they already have, and to gather more data.

Conclusions: what needs to be done?

The findings of this TJN report calls into question claims made by G20 leaders in 2009 in the immediate aftermath of the financial crisis when they declared that "the era of banking secrecy is over." This report underscores the need for policy makers to take their first serious steps to stem the growth of the global tax haven industry.

There is a long laundry list of measures that need to be taken now. These include a rapid roll-out of automatic and multilateral information exchange systems among tax authorities, county-by-country corporate reporting, and the deployment of public registries to record the ultimate warmblooded human beneficiaries of companies, trusts, and foundations and their like.

Our new report also highlights that the line between 'offshore' and 'onshore' tax dodging is blurred by the rise of secrecy jurisdictions like Delaware and Nevada and the City of London, alongside traditional hubs like Switzerland, Liechtenstein, Singapore and the Bahamas. We must aggressively deal with secrecy jurisdictions on both sides of this line.

Finally, given the lead role played by leading banks, law firms, and accounting firms in 'enabling' all this dubious activity, authorities must develop far stronger compliance cultures and penalties for the pinstriped professionals and leading institutions who treat the facilitation of crime on a global scale as a legitimate source of profits.


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

AfricaFocus Bulletin can be reached at africafocus@igc.org. Please write to this address to subscribe or unsubscribe to the bulletin, or to suggest material for inclusion. For more information about reposted material, please contact directly the original source mentioned. For a full archive and other resources, see http://www.africafocus.org


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